Thursday, January 29, 2015

Markets rise on earnings hopes

Dow shot up 225 closing near the highs, advancers over decliners 2-1 & NAZ gained 45.  The MLP index rose 1 to 440 & the REIT index added a fraction to 354 (close to its new record high).  Junk bond funds inched higher & Treasuries declined.  Oil is stil stuck in the 44s while gold sold off (see chart below).

AMJ (Alerian MLP Index tracking fund)

CLH15.NYM....Crude Oil Mar 15....44.35Down ...0.10  (0.2%)

Live 24 hours gold chart [Kitco Inc.]

Germany’s inflation rate turned negative in Jan for the first time in more than 5 years, aggravating a slump in consumer prices in the euro area.  Prices in Europe’s largest economy fell 0.5% from a year earlier, the Federal Statistics Office said, the lowest rate since Sep 2009.  The forecast predicted a drop of 0.2%.  The ECB committed last week to spend at least €1.1T ($1.2T) on gov bonds to avert deflation in the euro area.  Prices in the 19-nation bloc probably dropped this month at the 2nd-fastest rate since the introduction of the single currency.  The outlook for lower inflation is boosting bonds as it preserves the purchasing power of their fixed payments.  Underscoring that point, Germany’s 30-year yield fell below 1% for the first time on record.  The euro-area inflation rate was probably minus 0.5% in Jan. 

German Inflation Rate Is Negative for First Time Since 2009

Bill Gross, former manager of the world’s largest bond fund, said the Federal Reserve (FED) will raise interest rates this year to end distortions that 6 years of near-zero borrowing costs have brought to financial markets.  Any increase by the FED will be slow to avoid startling markets that have gotten used to cheap money, & caution will prevail for a long time, Gross wrote in an investment outlook.  He likened financial markets to the board game Monopoly, in which a bank, much like the FED, supplies money to players who invest it in properties.  Gross said the FED realizes that for the game to function, players need incentives to invest.  “Capitalism depends on hope –- rational hope that an investor gets his or her money back with an attractive return,” he wrote.  “Without it, capitalism morphs and breaks down at the margin. The global economy in January of 2015 is at just that point with its zero percent interest rates.”  He has previously said that falling oil prices & a strong dollar constrain the FED from raising rates until late this year, “if at all.”  Gross said the FED may move by “25 basis points in July or August.”  He added in his outlook that the FED “will move up the Monopoly board’s interest rates in late 2015.”  The FED “will be very slow. The curve suggests in February 2019, they will finally reach 2 percent in terms of the Fed funds rate,” Gross said.  “And I think that’s about right, but it will take up three or four years to get there.” 

Speculation had been building for some time that Don Thompson CEO of McDonald's, a Dow stock & Dividend Aristocrat, might be in trouble because of its relative underperformance.  The Golden Arches, with 36K restaurants globally, has tremendous market share & reach, as well as paying a rich div, but the stock trailed many peers the last couple of years & patrons were voting to spend their dollars elsewhere.  Thompson is retiring as CEO & will be replaced by Steve Easterbrook, senior exec VP & chief brand officer.  The change will be effective Mar 1.  "Steve is a strong and experienced executive who successfully led our U.K. and European business units, and the board is confident that he can effectively lead the company to improved financial and operational performance," said Andrew McKenna, non-executive chairman.  Thompson's comments were that "there is a time and season for everything. I am truly confident as I pass the reins over to Steve, that he will continue to move our business and brand forward."  The CEO change is the latest of several in the past few months at MCD.  Although Thompson's departure was described as a retirement, it does follow a disappointing year, in which revenue fell for only the 2nd time in 20 years.  Additionally, 2014 was the 2nd-consecutive year that saw customer transactions decline.  The full-year earnings report was only issued last Fri.  MCD has been adrift for months, promising to change its menu, to make better use of technology & to be more open with customers in an effort to not lose diners to competitors.  While it remains an incredibly large business, it was less & less clear what it truly could do to serve up new growth.  The shares, & revenue, were stellar from 2003-2012, but it's been much tougher on the company since.  One of the latest setbacks occurred last summer, when its Asia operations were hurt by a supplier investigation in China.  The stock jumped up 4.49.  If you would like to learn more about MCD, click on this link:

McDonald's (MCD)

The oversold stock market had a rebound.  It was due after Jan was turning out to be having one of its worst months in history.  There are no shortage of problems.  A new gov in Greece is trying to figure out to deal with tons of debt.  The word default is being kicked around along with talk about leaving the EU.  Russia's debt is now rated as junk.  The MidEast is a confusing mess, that's where a lot of oil comes from.  The oil market is a disaster bringing confusion to a lot of businesses.  And the US recovery, while looking better in recent months, is still uneven as shown by today's housing data.  Stocks are nearing the end of the month which means money managers will buy or sell anything to make their results look better.  Sudden  moves in either direction are always suspect.  Market breadth was a bit thin today considering the advance by the averages.

Dow Jones Industrials

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